Yahoo's Mayer: There's More Upside In Search Than Display - But Programmatic Could Change That

Yahoo's struggles with its search and display businesses in recent years have reflected a deeper battle within the company about where its true strength resides. The pendulum has swung back and forth amid the serial executive changes over the last five years, which has seen Google and Facebook nudge Yahoo from its previously held leadership positions in both search and display.

While investors and analysts have largely applauded Yahoo's modest gains under CEO Marissa Mayer, who made her first appearance on an earnings call on Monday, ascertaining where the real growth is going to come from as she settles into her role remains a bit murky. For the most part, Mayer said that Yahoo's value will be revealed by emphasizing the "daily habits" of users' digital life, like "search, email, its homepage and mobile offerings."

During the Q&A portion of the earnings call, Mayer was asked point blank by Cantor Fitzgerald analyst Youssef Squali: if she had to choose one, where is the bigger growth opportunity for Yahoo? Search or display?

Mayer initially indicated that search was where the money was. But as she spoke, appearing to work out her thinking in mid-answer, she seemed to step back a bit and suggest that over time, display could be the real driver as programmatic buying becomes the dominant way online ads are bought, sold and placed. Ultimately, the impact of her statement was to suggest that the company still has a lot to work out when it comes to defining its vision.

To be fair, Mayer, a highly-respected veteran product developer at Google, has a lot on her plate. And given the tug of war between the notion of Yahoo as an "engineering" concern or a "marketing/content" driven tech company just reached a fever pitch when Mayer was brought over former interim CEO and head of North American sales at Yahoo, Ross Levinsohn, who left in July. In just the past week, Mayer has tapped her former Google colleague Henrique De Castro to help chart its advertising path, essentially replacing CRO Michael Barrett, the former CEO of AdMeld.

Much of the discussion of the earnings report -- see the release here -- was centered around gains resulting from the sale of its stake in Chinese digital content and commerce company Alibaba Group. In a nutshell, Yahoo posted an adjusted Q3 profit of 35 cents per share on revenue of $1.09 billion, which though just a 2 percent rise over Q3 2o11, was enough to beat forecasts for a profit of 25 cents a share on revenue of $1.8 billion, according to an analyst consensus from Thomson Reuters.

Yahoo’s total display ad revenue came in $452 million, or flat compared with the same period a year ago. In contrast, search ad revenue rose 11 percent year-over-year to $414 million.

Those numbers are not likely to change in the next few quarters. But over the next few years, it's not unreasonable to think that it could change. With both the near-term and long-term both weighing on her in her Yahoo earnings debut, read what Mayer told Squali about the balance of search and display:

"When it comes to search versus display, these two are already very large, very successful businesses. It's difficult to say which one we should choose and it’s really something of a false dichotomy. That said, I do think that there is potentially more upside in search. We can see right now that given some of the monetization challenges we've faced, that there is an opportunity there to improve monetization.

"At the same time, the content investment we've made yields so many impressions and pageviews, and so much opportunity around brand advertisement, that is very compelling. We have [users] who are interested in finance or in entertainment news, now interested in sports; we fundamentally have a great segmentation of audiences already. And many of the other people who operate in terms of display advertising are either less granular and they understand less about their users or are much more granular.

"What we find, and when I talked to advertisers, what I've seen and heard from them is that the way that audiences tend to aggregate on Yahoo is unique and particularly advantageous for them in terms of what they ultimately want for audience-based buying. And for that reason, I think that I'm bullish on both search and display, but given the trend towards audience-based buying in the advertising space, the display opportunity is particularly compelling."

The immediate reaction to Mayer's early tenure was positive in the eyes of investors and analysts. But the honeymoon period is still in session. How things look a year from now, especially as Google and Facebook continue to battle it out for share of the display pie, will likely show just how successful Mayer's recent reaffirmation to "invest in our display ad technology, including guaranteed, non-guaranteed, Genome and the Right Media Display marketplace" will be ultimately be.

Jefferies analyst Brian Pitz captured Yahoo’s Q3 moment in a research note following the call, saying, “A first look at Yahoo!'s earnings shows that… the company's core display business came in below what the Street expected and what we had originally modeled, but search came in better than expected.”

Expect Mayer to concentrate on managing those expectations, first and foremost, over the course Q4 and the following quarters.